Gray Market 101: Definitions, Risks Factors, and How to Combat it

With the rapid globalization fueled by technology and greater economies of scale across various countries like China, the proliferation of gray market products is widespread. In order to protect their investments and IP, brands much remain diligent and proactive in protecting their assets across all physical and digital channels.

But many people still don’t truly understand what a gray market is, how it’s impacting their business, and what they can do about it. This blog serves as a primer for understanding what the risk factors are of gray market products and proven strategies to limit the impact on your brand.

Adding Color to the Gray Market

A gray market refers to distribution channels that are not authorized by the original manufacturer or trademark holder. Gray Market products flow through these unauthorized channels via brokers and even authorized partners, likely abusing incentive programs and not complying to distribution agreements, normally at discounted prices with the primary motivation of making additional margin or revenues.

For example, an OEM may authorize a special price with deep discounts for a “large corporate customer” that is fictitious. This enables the channel partner to then divert the product across customers and/or regions and retain the additional margin.

The reality is that most OEMs have good terms and conditions and pricing guidelines that establish authorized channels and consequences for not complying; however, many companies have not sought to monitor and enforce those terms. Creating a greenfield of opportunity for infringers to take full advantage without concern.

Furthermore, companies in the development stages of building a Channel Management program are often reluctant to enforce contractual terms around authorized channels, and qualification for incentives/rebates — as they fear potentially damaging channel partner relations by enforcing the terms.

Keeping OEMs Accountable

With all of this under-the-table activity going on, who is responsible for trying to stop gray market activity? This responsibility falls squarely on the OEM to enforce contractual terms defining the authorized channel. If an OEM doesn’t enforce those guidelines, the channel partner is incentivized to participate.

Channel partners are receiving additional margin from OEMs that do not assess the validity of claims, perform channel compliance activities and monitor and enforce contractual terms around authorized channels and pricing program terms.

Understanding the Risks of Gray Market Products

The risks associated with the introduction of gray markets can be significant. The OEM not only loses margin due to price erosion, but they are also subject to additional risks that gray marketers introduce.

For example, gray market products may not be new genuine products, rather, the products may be refurbished or used but sold as new causing dissatisfaction to the end customer. A customer who buys the product under these conditions may later find out that the product isn’t covered by customer service or a warranty. As these issues arise, there is a negative impact to the OEMs brand, as well as additional costs if the OEM chooses to provide customer service and warranty the product.

But the risks don’t stop at simply price and margin erosion. Gray market products can be introduced into unintended markets which can impact the OEMs brand. Also, there is no control over used or damaged products being distributed across channels. Last, the spread of gray market products opens the doors to counterfeiting which may result in customer satisfaction issues, business interruption or data loss.

Ways to Combat Gray Market Products and Associated Risks

The silver lining is that there are proven methods to curb behaviors that fuel gray markets. Implement and use serial number tracking for hardware devices from sale by the OEM, through a distribution channel, claims processing to product registration, service and warranty replacement by the end customer.

The fact is, channel partners have been around the block and understand OEMs need to monitor the channel and assess compliance to contracts and pricing terms.

OEM’s must implement a consequence management protocol for non-compliance to contractual terms. A debate should not be occurring as an issue arises, there should be a process in place with an owner and agreed to protocol to manage non-compliance and/or abuse, including an exception sign off process if the business so decides.

Another practice is to include provisions in your distribution and reseller agreements. In fact, you can also include similar provisions in the pricing program guidelines that spell out that gray marketing is not allowable and specifically call out consequences (e.g., disqualify for a program, clawback of incentives, will not qualify for MDF funds, etc.). Most importantly, it’s important to have the channel partner agree is some written form that understands the consequences rather than just post a message to the partner.

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